Taxes for Bargain Sales and Benefits Against Donations


Taxes for Bargain Sales and Benefits Against Donations




Handling Taxes for Bargain Sales and Benefits Against Donations
Donations, whether in cash or in-kind, will generally be tax-deductible. However, when a donor receives a good, service or a reduced price against a donation, then such benefits need to be accounted for when claiming a tax deduction.
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Taxes for Bargain Sales and Benefits Against Donations





Handling Taxes for Bargain Sales and Benefits Against Donations


Bargain Sale



A "bargain sale" donation is a donation whereby a donor sells an item or items to a qualifying charity organization at a lower price than the general price or the market price. The donor can then claim a donation tax deduction on the difference between the market price and the price sold to the charity.


However, bargain sales are a common red-flag for an IRS audit as they are prone to misuse. In the past, donors have colluded with non-profit organizations to defraud the IRS of taxes. You, therefore, need to have all documentation in place and ensure that the whole transaction is above the line. Even when the transaction is above the line, you should especially be careful when seeking a bargain sale for a property whose value has significantly appreciated. If the bargain sale is such that the person selling the item gets into a tax advantage by avoiding capital gains, then the IRS may turn down the donations on technicalities. In the past, the IRS has won several such cases where a taxpayer was seeking to save on taxes through a bargain sale.

Benefit against Donation


When a taxpayer makes a tax-deductible donation to a tax-exempt organization and receives some benefit from the donation, he or she must deduct the value of the benefit from the donation amount before claiming a deduction. For example, if attending a fundraising dinner, one must subtract the regular price of the dinner from the amount donated. However, if one receives some noncash item such as a certificate or a personalized souvenir for the donation, then they do not need to deduct any amount from the donation amount.

Other Qualification Requirements



As you make your bargain sale or other donation, you will also need to ensure that you meet all other IRS donation deductions requirements to ensure that your donation qualifies for tax relief. These requirements include;



Qualifying Charity - To qualify for a deduction, you will need to ensure that the charity organization that you are donating to is a valid tax-exempt organization. In 2011, the IRS commenced a procedure whereby, tax-exempt organizations that did not remit periodic compliance records would get de-registered. Therefore, you will need to confirm with the IRS website to ensure that the charity organization that you are donating to is up to status.


Donation Limits - The IRS has set limits of deductible donations based on one's income and the type of nonprofit organization receiving the donation. The IRS has categorized all tax-exempt organizations in eight different codes (Code1 to Code8). Depending on the organization's code, a taxpayer can claim a maximum donation of between 30% and 50% of his or her Adjusted Gross Income (AGI).


Itemization - Finally, a tax deduction against donations is only available for taxpayers who itemize deductions and therefore not available to those who opt for the Standard Deductions.